Strategic defaulters who walk away from their mortgage may be refused a new loan from Fannie Mae for 7 years.
In order to cut losses from borrowers who strategically default on their mortgage because they owe more than the home is worth, Fannie Mae stated that borrowers who had the capacity to make loan payments, but walked away from their mortgage, would be ineligible for new home financing for a period of 7 years.
Falling real estate values resulted in many homeowners being “underwater”, where they owe more than their home is worth. Strategic mortgage defaulting creates some ethical as well as credit issues, but it has become more of an acceptable choice, even with people who can still make their payments.
Fannie Mae, one of the primary sources of home financing in the U.S., continues to face major losses from mortgage defaults and foreclosures. Their plan is to try and prevent more losses by threatening to lock out “strategic defaulters” from financing another home for 7 years after a foreclosure. Borrowers who show extenuating circumstances or attempts to prevent the foreclosure, such as a loan modification, may have the waiting period reduced to 3 years.
Some people claim this is needed to discourage strategic defaults, but others say the action by Fannie Mae has the potential of slowing the housing market recovery. Their argument is that strategic defaulters walk away from a mortgage because of negative equity, but they still have the required income to buy real estate. Banning these potential home buyers could essentially reduce demand for homes, which can affect real estate values.
Will Fannie Mae’s strategy of trying to lock out borrowers who strategically default on their mortgage really work? Not unless other government sources of home financing, such as, Freddie Mac and FHA adopt similar restrictive mortgage default policies. Also, adding a foreclosure to a credit report typically precludes a borrower from qualifying for a mortgage for at least two years, which may be a sufficient deterrent for borrowers who still have good credit.
A borrower’s motivation for a strategic default may depend on how deep they are underwater. Having a mortgage that’s twice the value of a home could be somewhat motivating. The prospect of being stuck with a loser investment that may not reach a break-even point for 7 years or more may be enough to take walk.
Written by R. Smith: Mortgage Refinance, Home Mortgage Rates
categories: mortgage,real estate,homes,finance,uncategorized
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